Following the xUSD Collapse: Does Aave’s USDe Hardcode Expose DeFi’s Critical Weakness?

Following the events of this week, it is clear that Decentralized finance has entered a new era. Indeed, more than $132Bn is currently managed by various protocols, with Aave being the largest among them. Over the years, the team has established a reputation for caution, and the outcomes reflect this for all to observe.

At present, Aave oversees assets valued at over $32.2Bn across 18 chains as of this moment. Nonetheless, a significant portion of these assets is held in Ethereum. The fact that Aave holds more assets than Lido, a available volume locking tokens platform that primarily secures Ethereum, is a significant endorsement for decentralized money markets.

(Source: DefiLlama)

This remarkable growth is mirrored by the swift rise in AAVE crypto prices in 2025. Ranking among the top 50 most valuable coins, AAVE crypto has surpassed BGB, the crypto token associated with Bitget. And there’s more—AAVE is valued higher than PYUSD, the stablecoin tied to PayPal, the payment processing giant.

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Aave Is Radiating Success, Yet a Concern Exists

Despite managing billions and the protocol’s ability to endure the recent “destructive” market fluctuation, particularly on October 10, there are emerging concerns regarding the preferential treatment afforded to USDe and sUSDe by Aave.

Earlier this year, there was a proposal  (approved, as noted) aimed at “hardcoding” the floating prices of the algorithmic stablecoins sUSDe and USDe, issued by Ethena Labs, to USDT.

Despite Tether’s reserves lacking an official audit, USDT has managed to maintain its peg in recent times.

Unfortunately for the crypto space, a drop in USDT could lead to billions in liquidations, predominantly within decentralized money markets such as Aave.

Thus, it seemed reasonable for USDe and sUSDe to be directly connected to USDT through a manual adjustment. Ideally, this situation should not arise, especially if decentralized oracles could function as intended.

Nevertheless, this hardcoding proved beneficial for many USDe holders on Aave when digital currency prices plummeted on October 10. While perpetual exchanges amassed billions in liquidations, another event unfolded.

USDe experienced a depeg on Binance, dropping as low as $0.65 due to redemption pressure and notably, the failure of delta-neutral strategies. Intriguingly, across several other platforms like Curve, Coinbase, and Uniswap, USDe maintained relative stability around the desirable $1 mark.

(Source: Hosseeb, X)

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DeFi’s Pivotal Moment

While the hardcoding of USDe with USDT protected substantial collateral from liquidation, risks still persist.

This turmoil originates from the recent disturbances following the incidents at Stream Finance and the xUSD depeg.

One analyst notes that the pursuit of increased TVL drives decentralized money market platforms like Aave to “hardcode” stablecoin oracles.

In his assessment, if a significant depegging event were to occur, these platforms could be deemed responsible and “complicit in the rekt of user funds.”

Insights can be drawn from protocols such as Morpho, Euler, and Elixir, which also hardcoded their xUSD stablecoin oracles to $1 in order to mitigate volatility and avert widespread liquidation.

Despite their soaring TVL, the troublesome aspect is that such practices create a misleading sense of stability that appeals to users seeking consistent yields.

For a time, Aave’s hardcoding of USDe spared millions from liquidation, but it obscures inherent risks. When xUSD, utilized as collateral in platforms like Morpho and Euler, fell apart, these protocols found themselves unable to recover. To add to the woes, lenders remain trapped, unable to withdraw their funds.

https://twitter.com/robdogeth/status/1985768395631955969

While not the most favorable option, critics suggest that protocols should embrace real-time, market-driven pricing from oracles and confront market fluctuation directly. Admittedly, liquidation would be unavoidable, but this approach would offer security against bad debts and encourage improved risk management, even at the cost of user experience.

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The post After the xUSD Crash: Does Aave’s USDe Hardcode Expose DeFi’s Fatal Flaw? appeared first on 99Bitcoins.